Subramanian, Virmani make case for rate cuts | Business Standard News

Subramanian, Virmani make case for rate cuts | Business Standard News

My VIEW:

UNDERSTANDING RATE CUTS



M
G Warrier
2005/1-D,
Dreams,
LBS
Marg
Bhandup(West)-400078
 (Mobile +919349319479)

The Editor
Business Standard

Letters
June 18, 2015

Rate cuts
This
refers to the report “Subramanian, Virmani make case for rate cuts” (June 18).
Let us first see what Subramanian said about rates. He said on June 17 that
high interest rates would make the task of corporate in improving their
stressed balance sheets even more difficult. According to him, resolving the
stressed balance sheet problem which is currently a serious impediment to the
revival of private investment at high real interest rates becomes even more
difficult. Whether a further cut in the central bank’s base rates is the right
solution for this problem is open for debate.
With
the exception of very few economists and analysts including CEA and Virmani,
there is near consensus on the disconnect between RBI’s base rates and the real
ground level realities in regard to deposit and lending rates. Of late,  the focus is shifting from forcing RBI to
‘cut’ rates again and again, and policy makers at the highest level have
started acknowledging the need to ensure that the effect of cuts already done
reaches the beneficiary down the line, namely the borrower who deploys the
credit availed for productive purposes.
It
is intriguing that CEA gets unduly worried about interest burden of
Non-Performing Companies(NPCs), which incidentally add to the NPAs of banks and
  all the sermons from the Finance Minister are
addressed to Public Sector Banks which are burdened with heavy social sector
responsibilities which add to their stressed assets and draw on their resources
due to the huge number of accounts(both deposits and credit) they have to
service. Private sector banks are still enjoying the comfort of their choice of
borrowers. Last week only HDFC Bank(a major private sector bank) MD said, “…I
turned digital, I got into semi-urban and rural areas, I got the brand, systems
and people…” Such claims make one wonder, why the share of private sector banks
in banking business is not growing fast and why the FM is speaking exclusively
to public sector banks when it comes to social sector or financial inclusion
issues.
Back
on rate cut, it has to be clearly understood that base rate cut by RBI does not
directly result in reduced cost of funds for banks. That is why the deposit
rates get affected first and long after, when pressure mounts, depending on
market scenario, a part of the benefit is shared with borrowers by reducing
lending rates.
It
is necessary for all the stakeholders to reconcile to the reality that whether
in public sector or in private sector the resources belong to the country and
its people and government and organisations have to manage them with care.
M G Warrier, Mumbai 



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